Much ado about nothing
02 September, 2015
What an odd month we've just had. The markets were meandering along minding their own business when all of a sudden China burst onto the stage and said "BOO!" World markets got such a fright that they sold off for a few days, prompting media to reach into the archives and dust off fear-inducing headlines such as "Black Monday", "Markets in billion dollar bloodbath" and "Panic Selling Returns". The headlines, combined with breathless commentaries and images of anxious investors had the desired effect. Before long, investors were watching every blip and red arrow on screens around the world, wondering if this was a repeat of 2008 and 1987. Of course it wasn't, but it made for a horrible end to an otherwise ordinary month.
For me, the odd thing about August was that we already had a tumultuous July during which the volatile Chinese share market hogged the limelight. By the end of July, most reasonable people had realised that trading patterns on the Chinese share market are unfathomable and that Chinese shares are not at all an indicator of what is happening in the more important Chinese economy. So when the US share market reacted dramatically to an 8.5% fall in the Chinese share market and other markets followed suit, I thought: "What's going on!"
Commentators immediately blamed "concerns about China's slowing growth", citing poor manufacturing data as the catalyst. This was not new news — we've known that China's growth has been slowing for some time — and it was certainly not important or surprising enough news to prompt the market reaction that ensued. Rather, the wild last days of the month were sentiment driven and were not based on any negative fundamental news or developments.
As one analyst said, "At times the whole market became circular and reflexive in its response to events, creating a lead weighted spiral that saw markets haul each other lower as one responded to the performance of the other."
So what are we to make of it all? Firstly, this has been a correction not a crisis. Corrections tend to be short, sentiment-driven drops of 10% or more in a relatively short space of time. That's what we've had. Corrections are not particularly pleasant, but this is the sixth correction we've had since the bull market began in 2009, so we shouldn't be unnerved by it. In some ways it is good to get it out of the way because there has been a sense that investors have been waiting for a pullback as markets had reached the higher bounds of reasonable valuation.
Secondly, the volatility of recent weeks has been a brilliant reminder of the merits of buy-and-hold investing. Those who tried to trade this correction by selling high and buying low would have needed nerves of steel and perfect foresight. The market turning points were not at all obvious, and traders could easily have found themselves selling at precisely the worst time and then missing the best buying opportunities completely.
Thirdly, the market correction is not the only story of the last month. Other things have been going on that all long-term investors should be interested in. Consumers are still spending, jobs are being created and filled, and companies are growing their profits and paying dividends. We are in the final stages of earnings season and while few results have been stellar there haven't been any bombshells either. There is a bit of noise about slowing economic growth with some GDP forecasts being revised down, but it is growth nevertheless, and that's what we need if you are to meet your financial goals.
We look forward to seeing many of you during our Roadshow in coming weeks. I'm sorry that we can't visit every city centre, but we are always happy to chat by phone or email, especially when markets behave as they have in recent weeks!